Jordan Wealth Management Group - ScotiaMcLeod Truro

         Well, it's been 6 long months of declines in our stock markets. Here’s what we are thinking right now...   
 
·        News flow out of Europe and the U.S. has made for an increasingly challenging investment environment, and makes us more cautious toward the near term outlook
·        North American equity markets tumbled lower today following yesterday’s negative response to the comments and actions by the Federal Reserve.  The so called “twist” operation was received negatively by investors as their plan to push down long term interest rates and flatten the yield curve is an indicator of weak growth and/or recession.
·        The Fed’s reference to "significant downside risks to the economic outlook” also drove the market lower.
·        Further negative commentary out of Europe continues to weigh on capital markets as French banks are under significant selling pressure and investors look for action by the EU, ECB, and IMF to resolve the financial crisis through an orderly default by Greece.
·        The outlook for a prolonged period of low interest rates, at both the long and short end of the yield curve, has had a particularly negative impact on the financial sector, both banks and life insurance companies, which represent almost 30% of the Canadian equity market.
·        Market sentiment softened further on weak PMI data out of China overnight indicating a manufacturing slowdown and slowing economic growth in that country.
·        The weakness in stocks has been exacerbated by program trades which have kicked in and accelerated the downside moves.
·        Individual stock or company fundamentals are irrelevant in the current market context as the market’s direction is largely being dictated by events in Europe.  Everything rests with getting some resolution to the debt crisis in Europe and it appears that the market is forcing equities lower to push the EU and ECB into action sooner rather than later.
·        Subject to there being no further policy mis-steps in Europe or the U.S., from a technical perspective, there is the potential for another 5-10% downside risk in major stock indices before reaching their next support levels.  If the market holds the 200 week moving average on the Dow Jones Industrial Average, it could serve as a positive indicator.
·        Market volatility will continue and investors are encouraged to review the asset mix in their portfolios to ensure it appropriately reflects their risk tolerance.
·        Despite the low returns provided through holding cash, it can still be a component in balanced portfolios.
·        Equity valuations appear attractive and current events will ultimately lead to an excellent buying opportunity, but in the near term macro issues will continue to be the primary determinant of equity market direction.

.         Market bottoms usually need a day or period of capitulation selling, where someone says - I can't take this any more, sell everything. That's usually the time we have seen the worse of it - we just don't know it until later. Hopefully that time is upon us; and we will look back at this like other times and be saying "why didn't I buy then?". In the meantime; try to focus on the actual businesses you own a share of, not the market overall. Look at each company and ask yourself, am I comfortable that they will survive this latest recession and come out the other side, and keep on paying me their dividends while we wait? If you can't say that, please call me to discuss. Ted

So is this a replay of 2008?

Today (and this year so far) has been tough to be an equity investor. I have had more than one client say to me of late, "yes, I can take another decline, I know the markets always come back, but I don't know if I can take another 2008".

I do not believe this correction will be a repeat. Market moves have never mirrored the immediate past moves, and the reasons are always different; so why should this time be different? That being said, I will remind you that it is, and always will be about confidence, or lack thereof. Do you have confidence that your power or phone company etc will still be here a few years from now gouging you for the benefit of their shareholders? I do. Others may not if they are talking about what the price of a barrel of oil will cost next year and what will be the profits of the related oil companies in that business. That's what makes a market - no one truely knows for sure, so you invest where you are comfortable.

I am providing a synopsis of some personal and corporate viewpoints for you to consider as we go through the next few weeks/months:

Positive

•        Don’t be surprised to see China appear as the buyer of last resort of European debt – with their vast currency reserves and current account surplus, it is in their best interests to have an alternative to just the US dollar as a place to invest.

•        Most of the positive factors which supported equity prices during the rally between August, 2010 and this past April are still relevant, if not more relevant today as evidenced by another solid quarterly earnings season. 

•        Equities appear attractively priced in the context of still increasing profitability, cash-rich corporate balance sheets, growing dividends, and continued emerging market strength which should continue to support demand growth for commodities. 

•        Equities have been trading within a range-bound market over the past two years, and with the recent sell-off, we believe we are near the bottom end of that range.

•       Current weakening global economic conditions and geopolitical circumstances suggest interest rates will remain lower for longer.  Expectations for rate increases by the Bank of Canada and the U.S. Federal Reserve continue to be pushed out into 2012.  Low interest rates are supportive for equities.

•        Beyond an inevitable relief rally in equities, the catalyst for a more sustained rebound in equities is not clear; however, we have felt for some time that the Fed would not likely remain idle indefinitely and that further stimulative monetary policy action is to be expected.  QE3 is a real possibility.

•        Heading into a U.S. election cycle, political bias suggests further fiscal and monetary policy stimulus in the near term; indeed, President Obama discussed infrastructure stimulus measures in his first speech following the signing of legislation to increase the debt-ceiling.

•        Longer term, you want to own anything China needs to import. Themes will be agriculture, energy, water (China’s water table dropping 3 meters a year). This will be good for Canada’s exports.

•        The current decline in stock prices represents a buying opportunity for equity investors who can look out a few years or more.

Negative

•        Equity market sentiment has deteriorated over the past two weeks, and the downward spiral accelerated with the recent conclusion of the U.S. debt-ceiling controversy as investors re-focused their attention on other global economic factors.

•        Renewed concerns regarding euro-zone sovereign debt, (Italy is the flavour of this week), are also weighing on capital markets with Spanish and Italian 10-year bond yields trading above 6%.

•        The risk of a credit rating downgrade of U.S. debt is very real, but may already be mostly reflected in equity market valuations.

•        Markets are working through an adjustment phase to reflect a somewhat lower economic growth outlook.  Unfortunately, any valid solution to the debt and deficit problems faced by Europe and the U.S. will be a further drag on growth for an extended period.  In the U.S., jobs and housing data are expected to remain weak for several years.

•        China will be a big swing vote as to the future health of our economies and markets – they are slowing down growth while trying to contain inflation but still keep their populace working and reasonably content. They are using some pretty aggressive/creative and possibly corrupt reporting to backstop loans and growth and this could be a big issue down the road.

Neutral

•        Trading volumes have increased over the last several days and the sell-off has been exacerbated by on-stop orders, margin calls, and other program trades. While we have yet to see true market capitulation (and we may not), we believe that the potential market return is beginning to modestly outweigh the risks at current levels.

•       Our outlook is tempered somewhat by recent economic releases indicating the second half rebound might be more muted than previously thought, (although we should still see some rebound in economic activity from the temporary slow down caused by the Japan earthquake earlier this year); however, our intermediate and longer term bias still favours equities over all other asset classes.

•         Although share prices may remain range bound for several months, investors in diversified portfolios should be looking to selectively add equity exposure.  In addition to commodity cyclicals that are expected to outperform in the event the economic outlook improves in the second half of 2011, investors should also add to defensive, dividend paying stocks to counter ongoing equity volatility and enhance total returns.

Please call me at 896-7740 if you want to discuss what to do for your individual circumstances. All the best, Ted